John R. Graham is a financial, economic, and policy analyst in the health sector. His appointments include:
Senior Fellow of The National Center for Policy Analysis;
Senior Fellow of The Independent Institute;
Senior Fellow of the Pacific Research Institute;
Senior Fellow of The Fraser Institute;
Adjunct Scholar of The Mackinac Center for Public Policy;
Columnist at Forbes.com's The Apothecary blog;
Member of the Board of Visitors of The Benjamin Rush Society of medical students and physicians.

Mike Pence's Indiana Medicaid Expansion: Rhetoric vs. Reality

By Josh Archambault, Jonathan Ingram and Christie Herrera—Mr. Archambault and Ms. Herrera are Senior Fellows, and Mr. Ingram Director of Research, at the Foundation for Government Accountability.

Last Monday, Indiana Governor Mike Pence unveiled his so-called “conservative” case for ObamaCare’s Medicaid expansion at the American Enterprise Institute (AEI). Pence’s plan, dubbed the “Healthy Indiana Plan 2.0” or “HIP 2.0,” expands Medicaid to ObamaCare levels with so-called “POWER Accounts” that are funded by taxpayers and used by expansion enrollees to pay for care.

The mediaexalted the Pence announcement and characterized it as the latest red state to cave to ObamaCare. Indeed, some progressives sayKathleen Sebelius’ greatest achievement as Health and Human Services Secretary was getting Republican governors to expand Medicaid.

But at AEI, Pence was singing a different tune—he argued that he wasn’t caving into ObamaCare at all. “I’ve said it before and I’ll say it again — Obamacare must be repealed,” Pence said, (falsely) claiming his plan does not implement ObamaCare but instead “helps make the case for why repeal is needed.”

By definition, Medicaid block grants give states a fixed, lump sum of federal dollars in exchange for broad autonomy in providing Medicaid benefits. Pence’s plan features neither of these elements. Under Pence’s ObamaCare expansion, Indiana will draw down increasing amounts of ObamaCare in exchange for adding more people to the Medicaid rolls.

And as we pointed out previously, the Pence plan delivers ObamaCare Medicaid benefits, with ObamaCare Medicaid cost-sharing, to the ObamaCare Medicaid expansion population. It’s the worst of all worlds for taxpayers—Indiana’s Medicaid expansion under Pence’s plan will be a blank check with no real incentive or flexibility to control costs.

Reality: POWER Accounts under Pence’s Medicaid expansion are nothing like HSAs.

Dan Perrin at the HSA Coalition praises Pence’s plan as “expanding HSA-like plans … into places they must go to become widely used and accepted.”

But as we noted previously, POWER Accounts under Pence’s ObamaCare expansion are a pale imitation of the accounts created by Gov. Mitch Daniels’ original iteration of Healthy Indiana, and they look nothing like the HSAs that 96% of Indiana state employees have today.

According to America’s Health Insurance Plans, the number of people with HSA coverage has been growing by 15% per year, and at last count 15.5 million Americans have HSAs. Previous research estimates that nearly half of HSA households are in the “lower income” or “lower-middle income” brackets. HSAs in the private marketplace have been an unqualified success. True HSAs are working without subjecting them to an ObamaCare Medicaid expansion.

Notes: Assumes state employee health accounts are funded only to the extent necessary to cover plan deductibles, not all out-of-pocket costs.Amounts given for enrollees below 138% FPL

The table above highlights the significant differences between the existing Healthy Indiana Plan, the state employee HSA plan, and Governor Pence’s new expansion plan.

While state employees, and existing Healthy Indiana Plan enrollees are expected to contribute toward the cost of their health plan and health account, the minimum is $0 under the Governor’s plan. It also shows the stark difference in what percent of the health account contribution will be paid for by an enrollee versus what percent will fall on taxpayers. Milton Friedman’s famous quote comes to mind, “Nobody spends somebody else’s money as carefully as he spends his own.”

Rhetoric: Pence’s plan is designed to help 350,000 “working Hoosiers.”

Reality: The Pence plan creates a new entitlement largely for able-bodied, non-working adults.

In his Wall Street Journal op-ed , Pence says his plan will largely benefit the working poor. But being working-age is not the same as actually working.

Like all ObamaCare expansion plans, Pence’s Medicaid expansion would create a new entitlement for able-bodied adults. These are non-disabled adults in their prime working years, the vast majority of whom have no dependent children to support.

Data suggests nearly half of the Indianans expected to sign up for the Pence’s Medicaid expansion do not work at all. And fewer than 14% work year-round, full-time jobs.

And despite Pence’s inclusion of “Gateway to Work” in his plan—an as-yet-undefined, voluntary jobs portal for expansion enrollees—there is no work requirement for Indiana’s Medicaid expansion. This is a big departure from other taxpayer-funded welfare programs like TANF cash assistance, in which non-disabled, childless adults do not qualify for benefits at all and low-income parents must work between 20 and 55 hours a week.

What’s worse, Pence’s Medicaid expansion plan will likely discourage work because of its massive tax cliffs. Individuals will be incentivized to reduce their hours or drop out of the labor force entirely, because earning more income could force them to give up thousands of dollars in benefits.

Individuals below 138% FPL, for example, will contribute a maximum of just $300 per year to their POWER accounts under the Pence expansion, assuming the federal government allows Indiana to charge even that much. But if those individuals earn just $1 more and go into the ObamaCare exchange, they’ll be on the hook for at least $531 in annual premiums (after subsidies) if they pick the benchmark Silver plan. If they choose more expensive Silver plans, they could owe thousands of dollars more in premiums. Those individuals would also be responsible for up to $2,250 in deductibles, copayments, coinsurance and other out-of-pocket costs.

A new study released by the National Bureau of Economic Research confirms that previous Medicaid expansions to able-bodied, working-age adults have reduced employment and earnings among this population. According to researchers at Texas A&M University, Georgetown University and the University of Illinois, expanding Medicaid eligibility to childless adults could lower the likelihood of working by up to 10 percentage points. The researchers further found that Medicaid expansions could reduce earnings by up to $1,200 per year.

This builds on existing research finding that previous expansions reduced full-time employment and led to able-bodied adults dropping out of the labor market. Researchers at Emory University and the University of Colorado found that full-time employment among the new Medicaid population declined by more than 8% after expansion, while the share who did not work at all increased by nearly 11%. The Congressional Budget Office recently highlighted these problems, also finding that ObamaCare’s Medicaid expansion and exchange subsidies will discourage work. This is particularly troubling given the fact that full-time employment moves people off of government dependence and into self-sufficiency.

Rhetoric: Required patient contributions aren’t far off from the original Healthy Indiana Plan.

One of the early problems we noted with Pence’s expansion proposal was that it actually reduced skin-in-the-game from the existing Healthy Indiana Plan. Writing at Forbes, Grace-Marie Turner argues that the contributions required under Pence’s plan are “similar” to those made under the originally Healthy Indiana Plan. And by “similar,” she means “lower.”

The draft waiver request notes as much, confirming that Pence’s plan cuts required contributions in order to “reduce the financial barrier” to signing up for the ObamaCare expansion. According to the waiver, the average contributions paid in 2012 under the original Healthy Indiana Plan are up to 165 percent higher than the required contributions under Pence’s Medicaid expansion for the same income groups.

Indiana legislators take note: in 2011, they authorized the existing Healthy Indiana Plan as a less government-centric blueprint for Medicaid expansion. But the scaled-back patient contributions in Pence’s Medicaid expansion actually conflict with that law, calling into question the Governor’s legal authority to advance the plan he unveiled last week.

Indiana state statute requires a minimum contribution of $160 per year, but under Pence’s proposal, individuals can pay nothing and receive benefits under the “Basic” plan or contribute as little as $36 per year to receive extra benefits under the “Plus” plan.

Simply saying that Medicaid is not an entitlement does not make it so—especially when the Pence plan scuttles a work requirement and contains tax cliffs that trap enrollees in a cycle of poverty. And like other entitlements, federal law requires Medicaid expansions to provide the full suite of Medicaid benefits for those who qualify.

But a larger question remains. Does Pence’s ObamaCare expansion consign Indiana to funding a Medicaid entitlement with no way out?

At AEI, Pence echoed a common theme among GOP supporters who insist they’re able to take ObamaCare’s Medicaid expansion money while flouting ObamaCare’s Medicaid expansion rules. His plan includes a “trigger” that attempts to exit the Medicaid expansion if the enhanced federal funding drops below promised levels.

The federal government has said in non-binding letters that states may enter or exit the expansion as they please, but states should be wary that this non-binding promise has never been codified into law or regulation and Medicaid beneficiaries are likely to have standing to litigate the matter in federal court.

Ultimately, Indiana will be held to future bureaucratic interpretations of a vague law and yet-to-be issued court decisions, not to opinions expressed in non-binding letters from an administration intent on selling Medicaid expansion as far and wide as it can.

States do not need to expand ObamaCare in order to reform Medicaid

Pence himself admits that Medicaid is not a program that should be expanded, but rather one that should be changed. He’s right. States need to reform their existing Medicaid programs, not expand them.

That’s what makes his actions so strange. Pence is not proposing a comprehensive overhaul of Indiana’s Medicaid program. Instead, he’s proposing to expand Medicaid eligibility under ObamaCare. It appears Pence has embraced a more government-intensive position that the only way to reform a program is to expand it.

Would he have expanded Medicaid if ObamaCare dollars were not involved?

If a full repeal of ObamaCare were to occur, as Pence has said he wants, then his expansion funding would necessarily change. This alone highlights how closely linked Medicaid expansions are to ObamaCare.

Thankfully, other reformers know otherwise. Leaders in Florida, Kansas and Louisiana have pursued meaningful reforms to their existing Medicaid safety nets without caving to ObamaCare’s misguided Medicaid expansion. Rather than focus on improving the existing Medicaid program, as these states have, Pence has focused on putting window dressing on a new entitlement for able-bodied adults without children.

Grace-Marie Turner says this is “probably as much as Indiana could get” from the Obama administration. It’s hard to imagine them getting much less. If the deal goes through, Indiana will have capitulated to an ObamaCare expansion and lost the flexibility it had previously secured in the process. It will have created a new entitlement for able-bodied adults and left a broken safety net largely untouched for the truly needy.

Ms. Turner is right that Arkansas and Iowa were duped by the Obama administration’s false promise of flexibility and free money. Indiana is no different.

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this is a joke, Indiana is proposing having high deductible hsa for people that already cant afford to pay premiums, how are they going to pay for rediculous deductibles? let alone hsa count as income, so it is a double whammy for recipients.

Gov. Pence does have the legal authority under IC 12-15-44.2-21 and 22: http://www.in.gov/legislative/ic/code/title12/ar15/ch44.2.pdf – see “Changes to plan” and “Authority to amend plan.” The plan may be amended in any way necessary to comply with CMS and PPACA requirements, as well as any “federal law or regulation.”

Josh, I am a working-age, able bodied person in favor of PA medicaid expansion. 2 years ago I quit my job and insurance to attend law school. I signed up for a bare-bones insurance plan through the American Bar Association that cost around $100/month. About a year later, this plan was discontinued because it didn’t comply with ACA. I tried to sign up for ACA but even though my income was zero, the premiums cost around $200/month (for the lowest level coverage). I then tried to sign up for PA medicaid, but because I don’t have kids, and I’m not disabled I could not get coverage. So now, if I get hit by a Septa bus on my way to class my family will likely be bankrupt, and I’ll be in debt for the rest of my life, unable to contribute to the PA economy.

I’m admittedly not an expert on the economics of health care, but it seems to me that its in the best interests of PA to encourage adults to go to graduate school and earn advanced degrees. It will increase both intellectual capital and future tax revenue for the state.

Yes, it was my choice to give up my insurance and my job. But I did so to earn more money and make a better life for myself. Surely we don’t want to penalize folks for making this choice. Do we?

Stephanie thanks for reading our post. I think you have hit the nail on the head. What you are looking for is an affordable bare-bones insurance plan while you are in school, but the ACA has prohibited this. What you will be given instead is an insurance card that does not guarantee access to a doctor (as many docs don’t take Medicaid patients), and spends limited state education dollars or public safety dollars on an inefficient Medicaid system. We all applaud your efforts to pursue additional education, but policymakers should be focused on reforming our healthcare system to make insurance options as affordable as possible, instead of spending time and effort expanding a very broken system. As a taxpayer, I assume this is a goal we both can support.

Lamedam, Thanks for reading. The concern with providing “free” care to childless able-bodied adults relates to the impact it has on the most vulnerable. We have seen time and time again states create wait-lists, or stop paying for care for the most needy because they have given coverage to this new population. This impact should not be ignored, even if our elected officials don’t want to talk about it. On your point about the labor market impacts, if you think they are rubbish, then you are disagreeing with not just me, but the Congressional Budget Office (CBO) and a number of other studies.

A new study released by the National Bureau of Economic Research (http://www.nber.org/papers/w20111.pdf) confirms that previous Medicaid expansions to able-bodied, working-age adults have reduced employment and earnings among the new expansion population. According to researchers expanding Medicaid eligibility to childless adults could lower the likelihood of working by up to 10 percentage points. The researchers further found that Medicaid expansions could reduce earnings by up to $1,200 per year.

This builds on existing research (http://mcr.sagepub.com/content/69/6/645) finding that previous expansions reduced full-time employment and led to able-bodied adults dropping out of the labor market. Researchers found that full-time employment among the new Medicaid population declined by more than 8% after expansion, while the share who did not work at all increased by nearly 11%.

The Congressional Budget Office recently highlighted these problems (https://www.cbo.gov/sites/default/files/cbofiles/attachments/45010-breakout-AppendixC.pdf) , also finding that ObamaCare’s Medicaid expansion and exchange subsidies will discourage work. The impact is very clear.

I agree that expansion of Medicaid might cause some poor able-bodied adults to reduce their working hours or stop working altogether. This effect is however predicted to occur at the margins. The extend to which this may actually happen is dependent on the future interplay of several factors. There are several other policy tools that can be use to incentivize the unemployed to seek gainful employment.

After all, government provided health care coverage in Canada HAS NOT turned every Canadian into a lazy part-time worker dependent on government entitlements. Important factors such as family up-bringing, education, ambition, the desire to have better life and the all important desire to provide for dependents continue to incentivize 90% of Canadians to earn incomes above the poverty line.

Here is an important fact; there will always be people living below the poverty line ! No amount of economic liberalization or perfectly aligned economic incentives will change that.

Even Hong Kong, Singapore and New Zealand–the most free market economies in the world (as recently ranked by the Heritage Foundation)–have citizens living below their poverty line.

Considering the above, I believe that the general welfare improving benefits of giving healthcare to the poor far outweigh its labor market distortion costs.

Remember public policy is about balancing equity and efficiency. It’s not about ideologically emphasizing efficiency over equity or equity over efficiency.